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Raising Investment In a Risky Economy

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Exciting to interact with passionate entrepreneurs of Pakistan in an exclusive fireside chat with Jonas Eichhorst (Investor & Executive Chairman, Bykea). Revolving around 'Raising Investments In a Risky Economy', the discussion left the startup founders with multiple significant takeaways.

Below are the key points discussed.

Are startups in Pakistan investable? 

  • Yes, they are definitely investable but the problem lies in the lack of clarity of entrepreneurs as to what type of investment to go for.

There’s no doubt that Venture capital is the answer to innovative models, it is the answer to scaling startups but venture capital itself is also a business model – a model that only works for particular types of businesses. Venture capital only works if you have a plausible way of returning at least ten to 20x, 30x the investment size.

  • As founders, you should not immediately jump into the idea of getting investment. The entrepreneurs need to be realistic around what type of companies are venture capital firms. First you need to see if the company is venture backed, bootstrapped or is it in some sort of strategic partnership with a corporation. Weigh out your options before deciding.
  • Entrepreneurs need to be realistic about what type of companies are venture backable, and not fall into the trap of thinking that only VC backed companies are good companies.

What factors does an investor keep in mind when investing in a startup?

  • For early stage startups the investor sees the founder and the team.
  • "Why" are you doing this business?
  • What makes you special for being able to execute this business?
  • Is the business only targeted for an audience in Pakistan or are you planning to go international?
  • Is capital truly a limiting factor?
  • How patient are you? Or are you in it for quick returns?
  • It’s very easy to believe that you need money to do something but the reality is that for an investor the question as to why are you learning on their money and not on your own money and time, needs to be very clear.
  • The resilience of the business model depends very heavily on where it sits in the overall necessity space. Is your startup fulfilling a need that exists?

Entrepreneurs in Pakistan are struggling but VCs too are struggling. Do VCs in developing economies like Pakistan also going through a learning curve? Are they still not mature enough to become the Sequoia Capital and Bessemer?

  • It’s easier to blame an entrepreneur when the company is failing but the VCs too fall short. And this is true not just in Pakistan; but across the world, for, no investor can be certain as to which startup is going to succeed and which won’t.
  • Businesses have existed for thousands of years and venture capital only for the past fifty years. Hence, VCs are still learning what works and what does not.
  • A good investor is a good mentor and a mentor is one who asks good questions and makes you figure out the right path.
  • Choosing a VC is tricky. Know the difference between a VC and private equity investors. A good venture investor invests into people; private equity invests into models. Private equity investments have failed miserably in Pakistan; stay away from private equity investors who claim to be VCs.
  • An investor can never know your business better than you. So, it is the entrepreneur who has to constantly keep figuring out what works and what won’t. VC is no magic wand that will make your startup work.

How can an entrepreneur gain ‘trust’ of an investor, especially someone who does not even live in the same country?

  • There is always a margin for each one of us to make mistakes. However, it is the willingness to admit your wrongs and rectify them that builds trust with an investor because it reflects your genuinity.
  • How extreme you are willing to go to make things happen is another major factor that makes a startup founder earn the trust of an investor.
  • An investor invests in an entrepreneur’s ability to figure it out.

The Do’s and Don’ts for a Startup Founder

  • Don’t die. Companies die mostly because of their founders deciding that this is it.
  • When founders decide to kill their company, they need to be sure of the answers to how all of a sudden, the company has become unviable? Was it unviable before or, was it viable and this is just a temporary distortion?
  • Don’t follow the hype. You just can’t base your business model that was made by people in other parts of the world while being in Pakistan because they were made without any context and understanding of local market dynamics & the mindset of customers.
  • Many founders rush into businesses just because they listen to the investors who say we are investing into such and such businesses. Don’t do that, figure it out yourself. The conviction needs to come from within and is to be identified through your own thought process.
  • If you are dependent on external validation instead of being confident about your path – that is the end of your company.
  • Don’t start your company if you’re not willing to put the next 10 years of your life into it.
  • Don’t start your company if you believe that it is going to make you rich. If you want to be rich there are many other ways that have minimal risks involved.
  • Do it only if you actually have a burning desire to create something.
  • We need to get rid of the idea that venture capital is the only way to invest in a business, because although venture capital does make sense but it’s not one size fits all.
  • Yes, you do need money to start with but it is also wrong to believe that you can only be successful if you raise investment.
  • Fudging numbers to raise investment and taking shortcuts is the wrong approach. It doesn’t work that way.
  • A good investor is one who knows what will not work. What should be done is for an entrepreneur to figure out.